Measure it · Explain it · Revenue · Sellers & related goods · Taxes & farm income
Compute and classify |Ed| from words, a table, and a graph.
Q1–Q4Read published elasticities and explain why goods differ.
Q5–Q8The total-revenue rule and the unit-elastic peak.
Q9–Q11Supply elasticity, time, and the signs of income and cross-price elasticities.
Q12–Q14Tax incidence, tax revenue, and farm revenue after a supply shock.
Q15–Q20%ΔQ = ΔQ ÷ average Q
%ΔP = ΔP ÷ average P
|Ed| = %ΔQ ÷ %ΔP
> 1 elastic · < 1 inelastic
= 1 unit elastic
0 perfectly inelastic (vertical)
∞ perfectly elastic (horizontal)
Elastic: price ↑ → TR ↓
Inelastic: price ↑ → TR ↑
Unit elastic: TR unchanged
Es = %ΔQs ÷ %ΔP
Always positive—no absolute value needed.
More elastic the more time sellers have.
Eincome > 0 normal · < 0 inferior
Ecross > 0 substitutes · < 0 complements
The more inelastic side of the market bears more of the tax—no matter who writes the check.
The price of a bushel of wheat rises from $10 to $12. Quantity demanded falls from 1,000 to 800 bushels.
| Price | Quantity demanded |
|---|---|
| $8 | 120 |
| $6 | 150 |
| Food | Own-price | Income |
|---|---|---|
| Grapes | −1.3780 | 0.4407 |
| Oranges | −0.9996 | 0.4866 |
| Pork | −0.7297 | 0.4427 |
| Canned peas | −0.6926 | 0.3295 |
| Beef and veal | −0.6166 | 0.4549 |
| Fruit juice | −0.5612 | 1.1254 |
| Chicken | −0.5308 | 0.3645 |
| Apples | −0.2015 | −0.3514 |
| Rice | −0.1467 | −0.3664 |
| Cabbage | −0.0385 | −0.3767 |
| Sweeteners | −0.0045 | −0.0928 |
Published estimates keep the minus sign on own-price elasticities.
(a) Which food in the table has the most elastic demand?
(b) Which has the most inelastic demand?
(c) The price of canned peas rises 5%. Predict the change in quantity demanded.
| Food | Own-price | Income |
|---|---|---|
| Grapes | −1.3780 | 0.4407 |
| Oranges | −0.9996 | 0.4866 |
| Pork | −0.7297 | 0.4427 |
| Canned peas | −0.6926 | 0.3295 |
| Beef and veal | −0.6166 | 0.4549 |
| Fruit juice | −0.5612 | 1.1254 |
| Chicken | −0.5308 | 0.3645 |
| Apples | −0.2015 | −0.3514 |
| Rice | −0.1467 | −0.3664 |
| Cabbage | −0.0385 | −0.3767 |
| Sweeteners | −0.0045 | −0.0928 |
For income elasticity, the sign is the whole story: + normal, − inferior.
(a) Which food is the best example of a normal good?
(b) Which is the best example of an inferior good?
(c) Incomes fall 7%. What happens to the demand for apples?
A good with many close substitutes
A luxury good
An item that takes 67% of your income
Two estimates for gasoline, 0.4 and 1.8. Which is the short-run one?
The price of corn rises. Farm revenue rises. Consumer demand for corn must be…
The price of corn falls. Farm revenue rises. Consumer demand for corn must be…
aAlong a straight-line demand curve, the price elasticity of demand is the same at every point.
bTotal revenue is highest where |Ed| = 1.
cRaising the price always increases total revenue.
d“I would pay any amount for my morning coffee.” For this buyer, |Ed| = 0.
The price of milk rises from $3.90 to $4.10 per gallon. Quantity supplied rises from 10,000 to 14,000 gallons.
Real Christmas tree prices have risen because of supply shortages.
(a) Which is the most likely short-run price elasticity of supply for real Christmas trees?
(b) Why is short-run supply so inelastic?
(c) If high prices last for years, what happens to Es?
“In Florida, rising menu prices for UberEats and GrubHub have pumped up demand for DoorDash.”
Which elasticity concept is most relevant?
“In the Midwest, rising gas prices dent demand for tractors.”
The cross-price elasticity here is negative because…
Demand for alcohol is highly inelastic. The burden of a higher alcohol tax falls mainly on…
A fuel tax is imposed where the price elasticity of supply is 0 and demand is perfectly elastic. Who pays the tax?
Numbers chosen for illustration.
Before: $10.00 and 100,000 bottles. After a $2.00 tax: buyers pay $11.60, sellers keep $9.60, and 96,000 bottles sell.
A city wants the most revenue from one tax, and a tax works like a price increase. Using the published |Ed| values, which good should it tax?
A state taxes junk food so that people eat less of it. For the tax to actually deter consumption, demand for junk food should be…
Using supply, demand, and elasticity, explain how a drought could lead to a substantial increase in farm total revenue.
ASupply shifted to an inelastic part of the demand curve.
BSupply shifted to an elastic part of the demand curve.
CIn percentage terms, the change in price exceeded the change in quantity demanded.
DIn percentage terms, the change in price was less than the change in quantity demanded.
AGood X is a normal good.
BGood X is an inferior good.
CIf the price of good Y rises 5%, the quantity demanded of X falls 15%.
DIf the price of X rises 5%, the quantity supplied of X rises 5%.
EIf the price of X rises 5%, total revenue from X rises.
FThis market sits at the midpoint of a straight-line demand curve.
Average P and average Q are the bases, so the answer is the same in both directions.
That one comparison gives both the label and the total-revenue rule.
|Ed| = 0.7: a 10% price rise cuts quantity demanded 7%. Inelastic is not zero.
Income: + normal, − inferior. Cross: + substitutes, − complements. Supply: always +.
The more inelastic side bears more of a tax, no matter who writes the check.
Price moves more than quantity, so farm revenue moves against the size of the harvest.